AFTERNOON SESSION

Mr. DINGELL. The subcommittee will come to order.

Our next witness is John H. K. Shannahan, executive director of Electric Heating Association, Inc., 437 Madison Avenue, New York, N. Y., 10022.

Mr. Shannahan, we are happy to welcome you to the committee for such statement as you choose to give.

TESTIMONY OF JOHN H. K. SHANNAHAN, VICE PRESIDENT AND EXECUTIVE DIRECTOR, ELECTRIC HEATING ASSOCIATION, INC., ACCOMPANIED BY JOHN F. LANE, ATTORNEY

Mr. SHANNAHAN. Thank you, Mr. Chairman.

My name is John H. K. Shannahan. I am a vice president and the executive director of the Electric Heating Association. With me is our counsel, John F. Lane of Gall, Lane & Powell, of Washington, D.C. The Electric Heating Association (EHA) was organized about 5 years ago for the principal purpose of promoting the advantages and desirability of electric heating and to encourage its increased use by consumers. The nature and extent of our activities is summarized in my May 23, 1968, report to our members, a copy of which I am pleased to submit to the subcommittee.

EHA numbers among its members nearly all of the Nation's investor-owned, straight electric utility companies, as well as the principal equipment manufacturers, utility generation and transmission equipment manufacturers, insulation manufacturers, and many coal producers and coal hauling railroads. Our association membership, therefore, is reflective of all principal segments of the new and burgeoning electrical heating industry.

We welcome the chance to submit to the subcommittee facts and information pertinent to its inquiry which we hope will assist the subcommittee in its work and in certain respects clarify, if not correct, a number of matters which up to now have remained unchallenged on the subcommittee's record.

While the Electric Heating Association, Mr. Chairman, is importantly concerned with all matters of general application affecting or possibly affecting the marketing of electricity for electric heat, we must in frankness inform the subcommittee at the outset that our association does not advise its member companies respecting promotional practices they should or should not engage in when they market electric heating or electric energy. It is deliberate policy on the part of EHA to keep out of these matters for we feel that being subjects for determination in the light of local market conditions and the rulings of State regulatory commissions they are inappropriate for consideration at the level of a national trade association.

The real causes of the controversy that sparked these hearings can best be understood by reviewing the basic market that is being pursued by the three major energy sources: electricity, gas, and fuel oil. By reference to the U.S. census of 1960 and several subsequent studies I will show the nature of this market, the manner in which it is changing, and the intense competition which characterizes this market.

According to the U.S. census of 1960,1 gas had 43 percent of the domestic heating market, oil had 32.3 percent, and electric heating had less than 2 percent, in fact, 1.8 percent. Yet, as in so many cases, pure statistics sometimes conceal more than they reveal. What is not shown in this instance is the strong regionalization of the market. If one examines the census figures by States he will find that in each of the New England States oil had over 75 percent of the market; in parts of the West and Southwest, gas had as much as 90 percent or more of the market.

The picture that this kind of study of the 1960 census reveals is that of a market that is sharply divided regionally between gas and oil, and that in the sector of either, the control of that market bordered on the absolute. The market for oil was clearly defined geographically. It consisted of the eastern seaboard States from Maine to Florida, the upper Midwest consisting of the eight States centered around Chicago, and the upper Pacific Northwest-Oregon, Washington, Idaho. In each of these States, in 1960, oil had at least a 30 percent share of the market which, with few exceptions, was larger than the share held by gas in these same States.

What these figures do not reveal is the gains that had been made in these oil dominated States by gas, for these are the States where natural gas was not introduced generally until after World War II. These were the last States to be reached by the great pipelines. Until the late 1940's oil enjoyed a control of the heating market in these States with virtually no competition. By 1960, gas heat had made some inroad into oil's dominant position in these States. However, as the 1960 census shows, gas was not completely successful in its efforts. One of the reasons for this lack of success can be found in the fact that gas transmission costs to these States were relatively high, making for high retail gas costs.

Certainly the possession of 50, 60, 70, 80 or 90 percent of a market by a fuel makes it difficulty for another to enter the market. Certainly the existence of as much as 90 percent control of a market is evidence of the absence of vigorous competition between fuels or energy sources within that market. This was the picture of the home heating market in 1960.

In each year since 1964 FHA has conducted a national survey in order to determine the changes that are taking place in the marketplace as to heating. This is done for us by the Opinion Research Corp., of Princeton, N.J., a well-known and respected firm in this field. The results of this survey have been published by EHA and I would like to submit a copy of "Trends in Public Preferences for Home Heating Fuels" for the subcommittee's record.

In 1967 the national saturation of the three market contenders-see Trends, page 4-was: gas, 51 percent; oil, 27 percent; electricity, 6 percent.

In the 7 years since the 1960 census gas has been the big gainer moving from 43 percent to 51 percent, oil dropped from 32 percent to 27 percent, and electricity advanced from under 2 percent to 6 percent. Perhaps the most spectacular gains were made by electric heat which tripled its small share of the market. The 6-percent saturation means there are in excess of 3 million electrically heated homes in the United

1 U.S. Census of Housing, 1960: HC (1), U.S. summary table 7, pp. 1-28 to 1-33.

States today. These homes are served in approximately equal numbers by investor-owned and public power electric utilities.

So we now see some changes have occurred in the tightly controlled markets mentioned earlier. Oil's domination of its geographically compact market was first threatened by gas, and then by the new but rapidly growing electric heat. The market for gas has not been immune to change, for it, too, is now faced with competition from electric heat. Note that this is a rather radical departure for gas. In California, for example, where gas had 94 percent of the market and where one out of every 10 new homes is built, gas now has strong competition from electric heat.

In addition to identifying current saturations, our annual surveys have probed for future markets, or market trends, by seeking to determine customer preferences for heating systems in new homes. In the 4 years that we have been conducting these studies the national consumer preference for electric heating in new homes has moved from 22 to 36 percent, gas from 44 to 43 percent, and oil from 19 to 12 percent. This is shown on page 6 of our booklet. This suggests that the customer preference for electric heat will equal or exceed that for gas in another year or two. The drop in customer preference for oil speaks most eloquently for itself.

The importance of the EHA preference figures and their validity increased tremendously this year with the publication of certain construction statistics by the U.S. Department of Commerce.1 The Commerce Department publication detailed the heating systems installed in single-family homes during the last half of 1966. According to this report, gas went into 64 percent, electric heat into 20 percent and oil into 13 percent of the homes built in that period.

These figures also give a breakdown between those instances in which the selection of heating system was the decision of the builder (i.e. speculative homes) and those instances in which the choice was that of the consumer. In the instances where the consumer had the opportunity to exercise the choice, two important facts stand out:

(1) The preferences shown by the EHA survey for that year for each of the energy sources was almost identical with that reported by the Department of Commerce as installed where the consumer had the option; and

(2) In the case of electric heating the builder was installing electric heat at exactly one-half the rate that consumers were. The Commerce Department figures thus confirm the validity of our EHA survey and its consumer preferences. And they also show the existence of what we have since termed "The Builder Gap"; that is, the fact that the builder was lagging far behind the consumer in decisions to install electric heat. The importance of the builder gap is developed in a small EHA publication which I also submit for the

record.

Mr. DINGELL. Without objection that will be received for possible insertion in the record.

Mr. SHANNAHAN. This briefly is the competitive background of the heating market against which the current fuel battle is taking place. It has been a market characterized by the domination of either gas or oil depending upon the section of the country. When

Construction reports: Sales of New One-Family Homes; Annual Statistics, 1966; U.S. Department of Commerce, Bureau of Census (C25-66-13), p. 17.

electric heat came along, this competitive pattern was disrupted. In many areas of the country, gas heat felt competitive for the first time. In other areas, oil heat found it had to content with electric as well as gas competitior.

Clearly, electric heat was the newcomer and as such, it faced all of the classic problems involved with entering an established market, including the difficulties posed by the builder gap which I mentioned.

The advent of electric heat, contrary to claims made by some before this subcommittee, has not precluded competition for the domestic heating market, but in fact it has introduced new competition or increased old competition, in a market hitherto remarkably free of interfuel competition. Consumers today have two and sometimes three choices, where formerly they had little or none.

This new competition in the heating market resulted in intensified selling efforts on the part of all three contenders: oil, gas and electric. Part of these have been broadly described in "promotional practices." Testimony before the subcommittee has suggested that promotional practices are unique or peculiar to investor-owned utilities. Testimony has also suggested that the fuel oil industry is suffering as a result of these practices. We respectfully submit that sales promotion is a common ingredient of American commercial life and, germane to this hearing, is a practice vigorously engaged in by all who compete in the energy market.

In appendix A we offer for the subcommittee's consideration evidence that refutes much of this testimony. Specifically, the appendix

contains:

1. Evidence to support the conclusion that the fuel oil industry currently is enjoying record sales.

2. An indication of the extent to which the fuel oil industry engages in promotional practices.

3. An indication of the extent to which public power and cooperatives engage in promotional practices.

Mr. LANE. Mr. Chairman, may that be accepted?

Mr. DINGELL. It will be accepted.

Mr. LANE. May I also explain that in the same book are three other appendices pertaining to Mr. Shannahan's statement.

Mr. DINGELL. Perhaps we will insert all in the record, and if there is no objection, so ordered.

Mr. SHANNAHAN. The intense competition which characterizes this market is reflected in these very hearings. It is also reflected in the myriad of proceedings before State legislatures and State regulatory commissions and courts. There is submitted for the subcommittee's record and attached hereto as appendix B a "Summary of State Regulatory Decisions and Actions Respecting Utility Promotional Activities through July 1, 1968."

Mr. DINGELL. Without objection, that will be inserted in the

record.

Mr. SHANNAHAN. In submitting this summary for the information of the subcommittee we invite its particular attention to several points, namely:

1. The increasing volume of direct State regulatory action in the field of utility promotional practices.

2. The rapid and continuing emergence from this volume of decisional rules of relatively clear guidelines between reasonable and unreasonable legal and illegal-utility promotional activity, and 3. As stated by Mr. James W. Karber, president of the National Association of Regulatory Utility Commissions before this subcommittee on June 28, 1968, the evidence they provide that "the regulatory Commissions can be trusted to protect the public interest in this matter as they have in a long line of other problems heretofore satisfactorily resolved."

I think it is interesting to note that more than half of the regulatory decisions to date can be identified with States where oil has 30 percent or more of the market. Oil and its allies-all unregulated competitors-in line with their announced intentions have plainly been utilizing State regulatory procedures to harass its regulated competition.

Change of any kind brings resistance and dislocation. Those most subject to the forces of change are most likely to resist. We cannot but recognize that with the increasing share of the market being enjoyed by gas and electricity and corresponding smaller share by oil there will be dislocations among the oil retailers. There were similar market dislocations when oil replaced coal, when the auto replaced the horse and when the diesel engine replaced the steam locomotive. But in each of these instances and in many others, while some were hurt by the dislocations some accommodated themselves to it and benefitted. Such is progress to the benefit of the general public. The present instance is no exception.

Much evidence has been submitted to this subcommittee designed to show that small businessmen may have suffered from electric heat promotion. But no evidence has heretofore suggested that there have been substantial small business benefits directly attributable to that very same activity.

EHA undertook to obtain some measure of the benefits enjoyed by another group of small businessmen because of the promotional activities of electric utilities in their promotion of electric heating. We queried our members for information as to the number of small business firms participating in the electric heating market. There is contained in our "Appendix C" (1) a copy of my letter and questionnaire to EHA members requesting this date and (2) the summary "Tabulation of Returns."

By relating the replies to the number of electric heating customers of the 37 operating utilities surveyed we were able to project the approximate total for the entire country. Our projection revealed that: As of January 1967 there were over 172,000 small business firms, employing over 1 million persons, participating in the development of the electric heating market.

In a speech before the Fifth Annual Convention of the National Oil Fuel Institute, held in New York, May 10-12, 1966, George D. McDaniel, president of NOFI, said:

"We now find we have many allies in the heating contractors, the plumbers, and most recently the gas industry, whose customers are also being discriminated against. To date, we have found the best way to bring the facts out is through hearings before local state regulatory agencies.

These public service agencies have the power. We can get them to hold investigations through proper evidence, proper knowledge, and good local lawyers. In the rare instances where we have had trouble getting a hearing before the local PSC, we have brought it to the attention of the State legislatures, which have directed the PSC as to its responsibility.

"While we should continue these local efforts and in greater force, consideration of Federal antitrust laws should not be neglected. Some efforts have already been made in this direction. And although they have been unsuccessful thus far, if efforts are intensified, it may well result in recognition by antitrust authorities that it is about time they stepped into the picture."